Summary
Oracle Cost Management provides several alternative cost
methods. Generally, each Inventory
Organization has its own perpetual cost method.
The available methods are Standard, Average, FIFO, and LIFO
Costing. We will describe these perpetual
methods first and provide some guidance on selecting the costing method. At the end , we will discuss the
optional periodic cost methods.
Standard Costing
Standard Costing is the original costing method that Oracle
had for manufacturing and distribution customers. In Standard Costing, each item has a cost
defined for each inventory organization.
Different Inventory Organizations can have either the same or different
standard costs. The costs can be
directly defined or rolled up from components and lower level assemblies.
Organizations that use Standard Costing control their cost
by reviewing variances.
An item that is bought with a purchase order price different
from the standard cost generates a Purchase Price Variance (PPV). If the invoice is different from the purchase
order price, it generates an Invoice Price Variance (IPV).
An assembly that is built has a standard cost. Each job that produces assemblies may create
variances. Oracle separates the
variances for material, resources (labor or machines), overhead, and outside
processing (OSP).
Inventory moves around the organization and is tracked at
its standard cost. When the actual cost
is different from the standard cost, a variance is created.
Actual cost
methods
Oracle has three perpetual actual cost methods. They are actual in that they are not based on
standards. Each of the methods is
considered as Generally Accepted Accounting Principle (GAAP). The actual methods are Average Costing, FIFO,
and LIFO. We will compare and contrast
these methods.
Average Costing
Every receipt in Average Costing may change the average
cost. The purchase order receipt is
valued at the purchase order price plus the material overhead that may be
applied at the time of delivery to inventory.
This cost is included in the pool of costs for that item. The total cost for the item is divided by the
new quantity and a new average cost is calculated. This new cost will be use for issue
transactions of this item. If an invoice
is matched to a receipt, the IPV can be moved to inventory, changing the
average cost.
Accounting for interorganization transfers is similar to purchase
order receipt. However, the timing of
the reaveraging is based on the change in ownership (the FOB point).
When an assembly is completed from a job in Oracle Work In
Process (WIP), the cost of the completion is relieved from the job and goes
into inventory. As with the receipt
above, a new average cost is calculated.
Cost can be changed manually with an Average Cost Update
transaction.
FIFO Costing
(First In First Out)
Every delivery of a receipt in FIFO Costing creates a new
cost layer. The purchase order receipt
is valued at the purchase order price plus the material overhead that may be
applied at the time of delivery to inventory.
This cost is the cost for the new layer.
Each layer’s cost is kept separate but we do display a FIFO cost that is
a weighted average of all the layers.
Issue transactions (consumption) will use the first layer first. Issues that require a combination of layers
are costed at the weighted average of the appropriate combination.
Accounting for interorganization transfers is similar to purchase
order receipt. However, the timing of
the creation of layers is based on the change in ownership (the FOB point).
When an assembly is completed from a job in Oracle Work In
Process (WIP), the cost of the completion is relieved from the job and goes
into inventory, creating a new layer for the assembly.
How do I pick the
costing method?
Usually a company already has a costing method. They will be reluctant to change their
costing method because both the stock holders and the taxing bodies will need a
complex explanation of the reasons and the results. In government terms, this requirement is a
Cost Impact Study. Our job is to tailor
our costing methods to help them avoid the dreaded Cost Impact Study.
However you may be asked the pros and cons of the different
methods. This question is similar to
asking, “Which religion should I join?”
It’s a rhetorical question. They
probably want to know what cost methods we support and how well we support
them.
Attributes of Standard
Costing compared to actual costing.
Variances place the responsibility very specifically. Each variance account can be the
responsibility of a particular person.
After standards are set, job performance is primarily determined by the
person’s variance.
Product Managers are responsible for their sales and gross
margin based on standard cost.
Much of the accounting effort is setting standards and
analyzing variances.
Since transactions are costed at standard costs, they can be
costed before actual cost are collected.
Attributes of
actual costing compared to standard costing.
Since transactions are costed at actual cost, variances are
rare. IPV can be included in the item
unit cost.
Since items are transacted at actual cost, cost should be
collected before issuing the item.
Receipts and issues are costed in the same sequence as the transactions
are entered. Allowing inventory to have
a negative quantity balance may introduce variances.
Similarly, completions from WIP should be processed after
the charges to the job. The WIP cost
processor will cost all those charges before it costs the completion
transaction. If some charges are
incomplete, an algorithm provides an approximate cost.
Product Managers are responsible for their sales and gross
margin based on actual cost.
Accounting effort is reduced. Cost history and trends subtitute for
variance analysis
Attributes of
Average Costing
Average Costing is an actual costing method. Transactions are costed at the average cost
of the item in the Inventory Organization.
Each receipt of an item causes the item’s average unit cost
to be recalculated.
IPV can be posted automatically or with a review step.
An Average Cost Updated can be used to change the item unit
cost.
Attributes of FIFO
Costing (First In First Out)
FIFO costing is an actual costing method. Each receipt creates a separate layer with a
separate cost.
A Layer Cost Update can be used to change the item unit cost
one layer at a time.
The issues are costed based on the assumption that the first
layer created is the first layer
consumed. The physical consumption may
or may not be FIFO.
Returns create new layers rather than adjusting existing
layers.
Layers of components are held in WIP jobs.
The only times the system will specify a layer are the
Return to Vendor (RTV) and Assembly Return transactions. It uses the appropriate Purchase Order Layer
of WIP job.
Attributes of LIFO
Costing (Last In First Out)
LIFO is the same as FIFO except that the consumption rule is
opposite.
Perpetual versus
Periodic Costing Methods
Each Inventory Organization must select a perpetual costing
method from the four available methods.
These methods are perpetual in that transactions are costed during the
accounting period. Optionally, periodic
costing methods can recost the transactions without disturbing the original
cost. Although preliminary periodic
costing can be run during the period, the final periodic costing is run after
the accounting period close.
Periodic Costing
Periodic Average Costing (PAC) and Incremental LIFO costing
are optional cost methods.
One or both can be cost all the transactions in a period
without disturbing the perpetual costs.
Each periodic costing method can create one or more user defined cost
types. The cost types may differ from
each other by calendar, rates, or status (open period).
Only one cost type should be transferred to General
Ledger. In Brazil, some companies use
monthly PAC and do not distribute their perpetual costing method’s
transactions. The system provides strong
warning if more than one cost type has a transfer to General Ledger enabled.
Incremental LIFO is only used in Italy.
Periodic Costing can be the most accurate costing method.
By recosting after the period, you can
·
Match invoices to receipts including additional
invoices for freight, duty, and tax.
·
Use fully absorbed resource rates based on the
actual costs and actual usage.
·
Use fully absorbed overhead rates.
·
Recost all the jobs based on the just calculated
costs of components.
You can combine inventory organizations within a Legal
Entity to arrive at a periodic average cost for that Organization Cost Group.
You can specify periods of a month, quarter, year, or all
three.
You can set up cost types with different rates.
You can use the PAC cost to set standard costs or compare
them to your perpetual actual cost.
Remember: Only one cost type should be transferred to
General Ledger. A perpetual costing
method must be specified and may be used to provide management information
during the period. If you intend to
transfer a PAC cost type to General Ledger, do not transfer the perpetual
methods cost type to General Ledger.
Summary
Oracle Cost Management cost all transactions in
manufacturing and does the accounting for these transactions. Costing can occur immediately after the
transaction or can be over a year later.
Besides Standard Costing we provide several different actual costing
methods.
